Foreign investors have so far bought more than $15 billion of local equities in 2009, after selling US$13 billion in 2008, helping send Indian stocks up about 75 per cent and lifting the rupee to its highest in more than a year.

Brazil and Taiwan have taken steps to curb hot money inflows, and other governments are keeping a watchful eye on inflows, wary that they could fuel asset price bubbles.  “It (capital flows) is rising but we want it to rise a little bit more,” Montek Singh Ahluwalia told Reuters when asked whether government was considering restrictions on capital flows.

Asked if there was a possibility of India imposing a tax to curb capital flows, he said, “I will certainly not.”

Price bubbles

Ahluwalia said foreign funds were needed for developing infrastructure such as road projects and were unlikely to create asset price bubbles. “Bubbles only happen if you can’t use the money productively. We should be able to use it productively,” he said outside his office. India has said it needs to invest $500 billion on infrastructure over the five years to 2012. “So I do not anticipate any asset bubbles,” he said.

Economists, however, have said the government may need to impose restrictions on capital flows at some point to head off volatility in the stock and commodity markets. “The government is not likely to do it (impose tax) in a hurry, but, considering the steps taken by other emerging markets and the impact on the economy, it cannot be ruled out,” said Abheek Barua, Chief Economist at HDFC Bank.

He said flow of funds could become a “real problem” by next year, and India would perhaps have no other option but to impose restrictions. “The imposition of tax will not affect the long-term flow of funds, as a tax could be considered on flow of short-term non-FDI funds and restrictions on overseas borrowings,” he said.